How to Pay Off Credit Cards Quickly and Cheaply
Having too much credit card debt can be stressful, suffocating and debilitating. Whether you’re in debt because you had an unexpected expense or simply lost track of your budget, we’re not here to judge. The fact is, you need a practical solution. Be thy debts large or small, carried on one card or spread across many, we’re going to teach you how to pay off credit cards quickly and cost effectively.
In This Article:
1. List All Your Credit Card Debts
Step one is to collect all your credit card statements and put together a list which includes the name of the lender, credit card number, expiry date, amount of each debt and the minimum monthly payment for each card. Now exhale.
2. Transfer Balances
Next, consider applying for a low interest rate credit card that offers a promotional balance transfer.
Credit cards with promotional balance transfer offers provide several advantages:
- They allow you to stop paying interest during the credit card’s promotional period, which halts the cycle of escalating debt.
- Because you’re paying either low interest or no interest during the balance transfer credit card’s promotional period, all of your monthly payments go toward paying down your principal. This can dramatically speed up your debt repayment process.
- Consolidating all of your credit card debts onto one card allows you to make only one payment each month, simplifying your finances and reducing your stress levels.
3. Home Equity Line of Credit
If you weren’t able to get a balance transfer card, and you own a home, another strategy for paying off your credit card debt is to get a home equity line of credit (HELOC). HELOCs can be a great way to pay off debts because they typically offer very low interest rates and sizeable credit limits.
Moreover, many homeowners already have a HELOC built into their mortgage. As you pay down your mortgage, your bank often makes the amount you’ve repaid available as a secured line of credit. As a result, many people have a low-interest line of credit waiting to be used as a debt consolidation tool, without the burden of having to apply for a new loan.
There are, however, some noteworthy reasons to be careful when consolidating your credit card debt onto your HELOC. If you feel you might have trouble repaying your debt, be aware that your HELOC is secured against your home. Default and you could lose the home you’ve worked hard for.
4. Debt Consolidation Loan
If you can’t get a balance transfer or a HELOC, you should try getting a debt consolidation loan. With a debt consolidation loan you will use the loan principal to pay off your credit card debt, and then you’ll make a fixed monthly payment over a set term until your loan is paid down completely. Your interest rates will typically be lower than your credit card interest rates, but higher than a promotional balance transfer interest rate or a HELOC.
Be aware that some lenders might offer seemingly low rates, but with high fees or unfavourable terms, which could make the loan’s interest rate effectively higher than the interest rate(s) on your credit card debt. Do your research and review your rates, fees and terms in detail before you take out a debt consolidation loan.
Believe it or not, some banks/lenders might be willing to reduce your credit card interest rate if you call them and explain why you’re struggling with the debt burden. After all, it’s not in a lender’s interest if you default on the amount you owe. Remember, every bit of reduced interest you can negotiate for will ultimately save you money, and the worst the lender can do is say ‘no.’
6. Pay Your High-Interest Debt First
When prioritizing between different debts you have, try to pay off your highest-interest debts first. Mathematically it’s the fastest and cheapest way to pay down what you owe. Make the largest payments you can on the highest-interest credit card debts, while still making at least the minimum payments on the other cards. Once you’ve paid down one high-interest card, use those payments to tackle the next highest-interest card, and continue making the minimum payments on the other cards. Rinse and repeat.
7. Beware of Debt Settlement/Consolidation Companies
Debt settlement companies might claim they can negotiate with your creditors and reduce the amount you owe. While possible, it’s rare, and if successful there will still be a significant hit to your credit score. Moreover, you might be charged an arm and a leg.
Debt consolidation companies, on the other hand, will put you on a debt management plan, where you make one monthly payment and they distribute your payments to each of your creditors. Being put on a debt management plan will be reported to the credit bureaus and will negatively affect your credit score. Debt consolidation companies will also collect a fee for “managing” your payments.
While it may be tempting to offload your debt repayment strategy elsewhere, it will only further hurt your finances and creditworthiness. Take the time to come up with your own debt repayment strategy based on our other suggestions above.
Mind the Two P’s of Debt Repayment
Debt can be expensive and overwhelming, but it can be defeated with a little planning and patience. Using a balance transfer, HELOC or debt consolidation loan can be highly effective strategies to paying off credit cards.
Attack your debts head on. Be disciplined. Cut out the frivolous expenses and use whatever money is left over to pay down as much of your debt as you can.
Recommended Read: Should I Use a Loan to Pay Off My Credit Card Debt?